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Recession-Hit Euro Zone Has Turned a Corner: PMIs

Thursday, 24 Jan 2013 | 4:42 AM ET

The euro zone economy took a step closer to recovery this month as the rate of decline in the bloc's private sector eased more than expected, a business survey showed on Thursday.

The survey published by Markit supports European Central Bank President Mario Draghi's assertion that the 17-nation currency union is benefiting from "positive contagion" but still hints at an economic contraction in the first quarter of 2013.

Markit's Flash Composite Euro zone Purchasing Managers' Index, which surveys around 5,000 firms and is seen as a good growth indicator, jumped to 48.2 from December's 47.2, smashing expectations for a rise to 47.5.

While the index has now held below the 50 mark that separates growth from contraction in all but one of the last 17 months, Markit said the data suggested conditions in the bloc were improving.

"We shouldn't get too gloomy about those numbers. There is a turning point that took place towards the end of last year and the beginning of this year so things are picking up. Any downturn is looking likely to end in the first half," said Chris Williamson at data collator Markit.

"But (the PMI) is still consistent with GDP falling at a quarterly rate of about 0.2-0.3 percent."

The euro zone economy contracted in the second and third quarters of last year, meeting the technical definition of recession, and the downturn is expected to have deepened in the fourth quarter.

A Reuters poll published on Wednesday predicted a 0.4 percent contraction in the final months of 2012 and only a flat outlook for the current quarter - with tepid growth at best through to at least the middle of next year.

Earlier data from Germany, Europe's largest economy and the bloc's growth engine, showed its private sector expanded at its fastest pace in a year.

In neighboring France the downturn deepened, however, with its composite index falling to its lowest level since March 2009, when the euro zone was deep in recession.

Still, the ECB's Draghi is taking an optimistic view, declaring earlier this month that the euro zone economy would recover later in 2013 and that there was now a "positive contagion" effect in play.

Europe's top central banker cited falling bond yields, rising stock markets and historically low volatility as evidence for this, causing several forecasters to ditch expectations for an imminent cut in euro zone interest rates.

Export Led

The flash PMI for the bloc's dominant service sector, which accounts for the bulk of the economy, rose to 48.3 from December's 47.8, beating forecasts for 48.0 and chalking up its highest reading since last February.

The positive momentum drove optimism among the thousands of services firms surveyed to an 8-month high. The business expectations, which monitors what firms think the situation will be like in a year, bounced to an albeit still historically low 55.3 from 52.5.

"While it is improving, it is not indicative of particularly strong rates of growth, so no rapid recovery is in sight. But what this is indicating is a continued easing of the rate of decline in February," Williamson said.

This was echoed by the composite employment index, which fell to 46.0, its lowest level since late 2009, as firms reduced headcount to drive down costs and improve competitiveness.

(Read More: World Unemployment to Hit Record High in 2013: ILO)

A PMI monitoring manufacturers, who drove a large part of the bloc's escape from the last recession, jumped to 47.5 from 46.1, hammering forecasts for 46.5 and marking its biggest one month rise since early 2011.

The output index jumped to 48.0 from 46.0, its biggest rise in over two years.

In signs that the global economy is gaining traction, the rate of decline in new export orders eased to an 18-month low. The index rose to 48.8 from December's 46.6, despite the euro hitting an 11-month high last week.

"This is one of the key contributors to the improvement, not just within the euro zone, as what we have also seen in the broader global picture is things picking up," Williamson said.

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